Risk Finance and Asset Pricing: Value, Measurements, and Markets

CHAPTER 2

Applied Finance

OVERVIEW

This chapter provides a motivation for specific problems and issues that are considered throughout the book. Topics covered include insurance and finance; pricing and investing in securities (but also real investments such as in infrastructure, and their price); finance and the environment; finance and your pension fund; finance and the pricing of contracts (for example, a franchise contract); finance and the price of reliability and safety; and so forth. A retrospective evolution of financial theories and their application (most of which have garnered Nobel Prizes for their authors) is also presented. Finally, this chapter broadly outlines the extraordinary technological developments that are contributing to a growth of virtual financial enterprises, virtual markets, electronic trading, and the evolution of financial virtual universes that seem to usher in a new financial order. This chapter is mostly nonquantitative. Subsequent chapters are more specific and more technical.

FINANCE AND PRACTICE

Finance practice spans an extensive number of problems and issues, some of which are concerned with the question “At what price would we be willing to buy or sell an asset?” What is the market price? How can we manage and insure investment risks?

Risk Finance and Insurance

Insurance is used to substitute payments now for potential losses (to be reimbursed) later. It is based on a contractual agreement with one party (the insured) seeking to insure ...